World Risk Developments September 2010: Spotlight on African sovereign risk

The September issue of EFIC’s newsletter, World Risk Developments, examines sovereign risk in three African countries of interest to Australian mining companies: South Africa, Mozambique and Ghana.

In South Africa, a series of controversial decisions by the Department of Mineral Resources during 2009-10 altering mining companies’ exploration and development rights is causing concern about the security of such rights. The mining industry has become anxious. The government has responded with a pledge to resolve all cases of overlapping rights and publish the status of all applications for prospecting rights.  The industry is awaiting the outcome with interest.

In Mozambique, there have been recent protests against rising food and electricity prices.  But as EFIC senior economist Ben Ford notes, ‘Rising prices have been merely the trigger: the underlying problem is a lack of 'trickle-down' benefit from capital-intensive economic development’.  Mozambique has been recording compound annual growth of 8% in recent years, but the growth has been driven by a series of so-called mega-investments in aluminium, gas, coal and electricity, including two Australian projects: Riversdale Mining’s recent Benga coal mine and power station and BHP Billiton's Mozal aluminium smelter.  Ford remarks: ‘The non-inclusive nature of Mozambique's development raises the risk that the mega-investments may at some point be blamed – wrongly – for the country's growing economic disparities and targeted for protest or discriminatory policy.’

Ratings agency Standard & Poor’s downgraded Ghana to a lowly single-B last month.  Though the country is experiencing strong expansion of its gold industry and is also expected to start oil production next year, S&P has concerns about a large fiscal deficit and lack of regulation to deal with forthcoming oil revenues.  EFIC senior economist Dougal Crawford says: ‘Yes, the fiscal deficit is high.  And there are concerns about domestic payment and wage arrears. But the current government is bringing the deficit down quickly. And there are moves in parliament to institutionalise prudent revenue management.’  He believes S&P should have given Ghana the benefit of the doubt.

In other stories, the newsletter looks at: Ireland's bank restructuring, the strong Japanese yen, price controls in Vietnam, the floods in Pakistan, political change in Sri Lanka that could according to the US State Department ‘undermine democracy’, sectarian tensions in Bahrain, and contract renegotiation with oil companies in Ecuador.